US small caps expected to benefit from Trump effect

Expectations for tax cuts, infrastructure spending and deregulation in the US have boosted growth expectations, asset prices and the US dollar.

This confidence is also reflected in private banks’ investment decisions, according to PWM's Global Asset Tracker, with more than 40 per cent of respondents increasing allocation to US and global stocks, as well as the dollar, while implementing a sector rotation within US equities. Small caps have particularly benefited from the tailwind, and having export quotas below 40 per cent makes them less vulnerable to a stronger dollar.

“We believe that US small caps, the leading asset class since the election, will continue to outperform going forward because they are more immune to potential trade issues, they have a history of outperforming in this part of the economic and market cycle, and have less exposure to currency fluctuations,” says Jeffrey Mortimer, director of investment strategy at BNY Mellon Wealth Management. 

“Trump’s pro-cyclical measures should benefit cyclical stocks, and sectors like financial sectors, infrastructure and healthcare should perform well with the announced tax and regulatory initiatives,” says Norman Villamin, CIO Private Banking and head of asset allocation at UBP. 

Others are more sceptical. “We maintain a neutral stance in our overall allocation on equities,” says Alan Mudie, head of strategy at Société Générale Private Banking. “In the US, while the promised corporate tax cuts will further enhance earnings per share, higher interest rates and a strong dollar represent headwinds. Moreover, valuations are stretched. We are underweight US equities.” 

PWM's annual Global Asset Tracker survey is based on interviews with chief investment officers, heads of asset allocation and chief investment strategists of 38 selected, mainly global and regional, private banks. Together they manage more than $7.8tn in client assets globally. For the full results click here.